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Edited Transcript of SHLO earnings conference call or presentation 12-Mar-19 12:00pm GMT

Q1 2019 Shiloh Industries Inc Earnings Call

VALLEY CITY Apr 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Shiloh Industries Inc earnings conference call or presentation Tuesday, March 12, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gary DeThomas

Shiloh Industries, Inc. - VP & Corporate Controller

* Lillian Etzkorn

Shiloh Industries, Inc. - Senior VP & CFO

* Ramzi Y. Hermiz

Shiloh Industries, Inc. - President, CEO & Director

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Conference Call Participants

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* Alan W. Weber

Robotti & Company Advisors, LLC - Research Associate

* Richard Clayton Carlson

BMO Capital Markets Equity Research - Analyst

* Tom Harenburg

Carl M. Hennig, Inc. - Director & Owner

* Yucong Shi

BofA Merrill Lynch, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Welcome to Shiloh Industries First Quarter 2019 Results Conference Call. Today's call is being recorded. (Operator Instructions)

I'd now like to turn the call over to Mr. Gary DeThomas, Vice President, Corporate Controller of the company. Please go ahead, sir.

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Gary DeThomas, Shiloh Industries, Inc. - VP & Corporate Controller [2]

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Good day. Thank you, operator, and thank you all for participating in Shiloh Industries First Quarter 2019 Results Conference Call. I'm joined on today's call by Ramzi Hermes, our President and Chief Executive Officer; and Lillian Etzkorn, our Senior Vice President and Chief Financial Officer.

I'll begin by reviewing our legal disclosure regarding forward-looking statements. I would like to remind all participants that certain statements made during this conference call may constitute forward-looking statements. Although such statements reflect our current reasonable judgment, regarding the direction of our business, actual results might differ materially from those in the forward-looking statements. You can find information concerning why the actual results might differ from statements made today and in our management discussion and analysis of financial condition, as well as the results of operations and our filings with the SEC.

Our earnings press release was issued today and has been posted to our website at shiloh.com on our Investor Relations page. The earnings press release contains reconciliations of certain non-GAAP numbers presented on this call today, including adjusted EBITDA, adjusted EBITDA margin and adjusted earnings per share. Our Form 10-Q will be filed later today with the SEC.

A replay of today's call will be available. Instructions for the replay are included in today's press release.

I will now turn the call over to Ramzi Hermes, our President and Chief Executive Officer. Ramzi?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [3]

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Thank you, Gary, and thank you to all for participating on the call. I will begin with some comments on how Shiloh's technology positively impacted our business performance in the quarter, followed by updates on launch activity and new business wins, wrapping up with some color on the focused initiative that we have been discussing recently. Lillian will then walk you through the financials in more detail.

Technology is a clear differentiator in any industry. Shiloh continues to develop a commercialized propulsion-agnostic technology that is valuable to our customers and equally important, benefits the environment. This development is enabling Shiloh to progress our strategy to position the company as a technology leader by providing breakthrough lightweighting value-added solutions to the market.

We saw the positive impact of our technology commercialization in the first quarter as our revenue grew by 4.5% to $259 million, a Shiloh record for the first quarter. And a great result when compared to the 4.3% decline in North America and Europe market production.

We continue to expand the reach of our technology in our products globally, with 27% of our revenue coming from Europe and Asia and 73% of our revenue from North America. Our business in China, while in early stages, continues to ramp up. Shiloh grew its China revenue by more than 20% in the quarter, a favorable statistic when compared to the market which declined during 2018 and is expected to increase by just 3% for 2019. Further evidence of the demand for our lightweighting value-added products.

Our innovative products and technology have positioned us to grow with our customers in the region and to take advantage of exciting new opportunities that continue to present themselves. As we move from launch phase to production, we expect to see positive financial performance contribution from our China operations during the second half of 2019.

We also have a great opportunity to benefit from Tesla's recently announced plans to expand in the region given our existing relationship and our leading technology solutions for the EV market. The European market remains an important growth opportunity for Shiloh, and we believe we are well positioned to win in the region.

With an uncertain economic backdrop, industry sources are forecasting a market volume decline of approximately 4.5% this year. However, we continue to anticipate that the region will represent more than 30% of our revenue in the coming years based on our programs, investments in the region and customer relationships.

In North America, our lightweighting solutions continue to be well received. We are excited to have Shiloh content on 4 of the 9 finalists for the 2019 North American Car, Truck and Utility of the Year award, including the Ram 1500 which was the Truck of the Year winner. The North American region was impacted in the quarter by softening industry production trends during the period, which included certain OE shutdowns during the holiday. As we look forward in North America, we continue to see softening demand and mix shift from cars to SUVs, while OEMs continue to navigate the impact and uncertainty of tariffs. Industry sources forecast North American volume to be essentially unchanged for the full year, following a 1% increase in the first quarter. We anticipate a modest volume decline for the balance of the year. We are also closely watching industry trends, and we'll continue to proactively align our resources and structure with demand. While there are concerns around industry volumes, we are excited about the number of new product launches that Shiloh has this year, which we will expect to offset some of the anticipated future market decline.

As discussed during our year-end call, launch activity for 2019 is elevated. We have 17 major launches occurring in 9 different facilities and 5 countries and 3 continents, a representation of a transforming Shiloh. In quarter 1, we are well into 9 of our -- of the 14 launches scheduled for the first half, while we are making progress and continuing to receive positive feedback from our customers, there is still more work to be completed. As you all know the launch process is complex and create short-term challenges as our operations bring new employees, new equipment and new technologies online. In the short term, these upfront costs and inefficiencies impact margins, but we see a clear path to generate improved margins in the second half 2019 as we move from launch to normalized production volume.

In the quarter, we generated new business wins, representing $290 million over the life of the programs, nearly 3x higher than year-ago levels. This win include Shiloh's innovative products that were sourced on large global platforms, including a number of notable trucks, SUVs and CUVs. We had new business wins with BMW, Daimler, Honda, FCA and Scania, among others, with products such as cradles and structural stamping.

Collectively, these represent exciting growth opportunities across all regions and are reflective of the acceptance of our leading technologies. Our products are found in electric vehicles, hybrids and clean combustion engine vehicles.

Now to touch on some of the projects and initiatives that the team is working on. New business wins are finding their way into some of our recently acquired European operations, while we simultaneously focus on integrating the facilities purchased from Brabant.

As you may recall, we had 3 primary objectives with this acquisition: obtain innovative product and process technology; add new capacity for business growth and strong team members; and three, provide backup capacity for critical technology that is being rolled out globally.

When Shiloh acquired the facilities in Oss, Netherlands and Verrés, Italy, both were our new business holds with many of their customers with expected volume declines. As a key element of our acquisition recovery strategy, we have successfully worked to get the facilities operating through Shiloh stringent global standards, allowing each facility to receive customer approval to accept new business as well as contingency site for existing programs, providing risk mitigation for our customers and great partnering opportunities for Shiloh.

I would be remiss if I did not comment on how I continue to be impressed with the engineering talent and the innovation capabilities of our new team members. During the quarter, we won a major European program with a contract value of nearly $200 million and with a launch in 2021. A primary driver of this win is our industry-leading technology in structural aluminum, more specifically, our innovative casting process, which enables aluminum to be welded to aluminum with high integrity, which allows it to be used on critical structural components.

We are taking advantage of this differentiated technology and now deploying it globally. We are also quoting on multiple platforms with major global OEMs for our Verrés facility and remain confident, we'll be able to announce additional wins in both of these facilities in the coming quarters.

On the operational improvement front, our North American restructuring activities progressed during the quarter as we continue to reduce fixed costs throughout our business. We are also using the Brabant integration project as an opportunity to evaluate our combined European capabilities and strategically shift production to the most efficient locations and facilities.

In addition, as we continue to watch current industry trends and market dynamics, we are working closely with our customers to understand their production strategies and product plans so that we optimally align our global operations. These actions line up well with our ongoing strategy to structure our business in a manner that enables us to adapt through the variability of our customers and market cycles.

In January, we completed the closure of our Pendergrass facility as well as a reduction in force in North America and Europe, flexing to volume. We continue to align our business with volume trends and remain focused on improving efficiencies to enable us to respond to potential changes in the cycle. We will continue to focus on ways to reduce fixed costs and streamline our global business, and we'll remain diligent should market conditions warrant additional actions.

In addition, we feel it is imperative to improve operational efficiency not only through facility consolidation but through technology and systems. We are implementing tools to better leverage data to improve equipment performance and supply chain efficiency. This transformation will include consistent consolidation and simplified processes, which will deliver improvements in operations, capacity planning and customer support along with improved profitability.

We have made good progress with the design phase and we'll begin a multiyear rollout of the systems to manufacturing plants, starting with a pilot launch in March. This initiative is more than a new ERP installation. It is a complete process and system upgrade that will bolster our infrastructure, allowing us to leverage to improve operational efficiency and rapid decision-making. We are moving another step closer to an industry 4.0 model with this first step along our journey.

To recap, as we add depth to our technology offering and expand our global capabilities, we continue to see significant opportunity to drive Shiloh content per vehicle higher. In addition, our new facilities in Europe are strengthening our global competitiveness, which is creating opportunities to not only drive content per vehicle but to increase the platforms we are on with existing customers and engage new customers.

Collectively, these represent exciting longer-term opportunities for Shiloh. We are taking advantage of the opportunity that our technology and our products are presenting as we continue to win new and profitable business.

From an operational perspective, we have made significant progress with our launches and restructuring initiatives that we believe will drive future growth and profitability. And we are closely monitoring changes to the industry conditions in our key market and importantly, began our adaptability initiative more than a year ago to better position Shiloh in a dynamic industry.

With that, I'll hand it over to Lillian to address the financials in more detail.

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Lillian Etzkorn, Shiloh Industries, Inc. - Senior VP & CFO [4]

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Thank you, Ramzi. During the quarter, we were very active with our launch efforts and made good progress preparing for future production. I am proud of the effort made by our operations and our engineers who spent time over the Christmas holidays to successfully launch multiple programs meeting customer needs.

As our launches continue to ramp up, we anticipate higher volumes and improved margins in the second half of the year, with premium costs subsiding and improving operating efficiencies taking hold.

Revenue in the quarter increased by 4.5% to $258.9 million compared to $247.7 million in the first quarter of 2018. Growth was driven by acquisitions, which contributed $21.6 million.

Revenue during the quarter was also impacted by changes in currency, which reduced revenue by approximately $5 million or nearly 2%.

As communicated in our 2019 guidance on last quarter's call, launch costs for the first half were expected to be high. As a result, gross profit was $13.7 million in the first quarter compared to $27.9 million in the prior year period, representing a growth margin of 5.3%.

We see margins improving in the second half as a result of a reduction of premium expenses and moving towards a more normalized run rate.

For the quarter, net loss of $4.7 million compared to a net income of approximately $4.9 million in the first quarter of 2018. We reported a pretax loss of $7.8 million in the quarter. Adjusted loss per basic share was $0.03 compared to net income of $0.15 per basic share in the prior year period.

Adjusted EBITDA was $12.6 million for the first quarter compared to $16.6 million in the prior year period. Similar to gross profit, the year-over-year reduction was driven by higher launch-related costs.

We remain focused on our product strategy while pursuing opportunities for operational improvement. Our restructuring activities remain on plan, incurring approximately $3 million of costs during the quarter.

We expect to incur additional costs over the next 12 months, with future restructuring actions based on market conditions, customer actions and other factors. As of January 31, 2019, cash and cash equivalents were $11.7 million. Cash generated from operating activities for the quarter was $6.4 million, and we invested $15.7 million in capital equipment.

Net borrowings under our revolving line of credit were $238.6 million and our leverage ratio was 3.2x on a net debt to trailing 12-months adjusted EBITDA basis. Longer term, we continue to target leverage in the mid-2s, while managing investments to grow the business.

Turning to our outlook for 2019. Our end market assessment remains consistent with current industry forecast for volume to be down slightly year-over-year. We continue to expect our new business activities will allow us to outperform the market decline. While we are pleased with the new business going into production, there is a short-term financial impact given the concentrated number of launches and complexity of the products being launched.

While the market remains dynamic, we are pleased to be reiterating our stated 2019 revenue guidance of approximately $1 billion to $1.15 billion and adjusted EBITDA of $62 million to $70 million. This is consistent with what we communicated at the end of our prior fiscal year, and we expect our adjusted EBITDA margin to improve over the course of fiscal 2019, with the first quarter results just reported being the low point for the year.

We continue to see margins accelerating to a more normalized run rate in the second half of the year as our higher-value-added products begin to contribute more meaningfully. Overall, as we look forward, we remain encouraged about our ability to deliver our commitments.

I will now turn the call back over to Ramzi for some summary remarks.

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [5]

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Thank you, Lillian. In summary, we are positioned to manage market uncertainty with our operational flexibility in the short term and content per vehicle opportunities in the long term. We are focused on executing our new product launches in a manner that meets our customer's performance expectations while keeping costs in accordance with plan. And we continue to see and execute on opportunities to strengthen our operational footprint to remain aligned with our customers as we integrate our new facilities in Europe and expand select facilities in North America and in China.

These efforts, combined with our drive towards an industry 4.0 model, position the company for success.

With that, operator, we are now ready to go to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Richard Carlson with BMO Capital Markets.

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Richard Clayton Carlson, BMO Capital Markets Equity Research - Analyst [2]

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So, solid top line performance you had in the quarter. I was wondering if you could talk a little bit more about that. It looks like after I take out the acquisitions, went down a little bit organically, you still outperform what the market did. How much of that was mix-driven? And maybe some of the launches you already had into some of your volume?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [3]

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The -- you're correct on the -- acquisitions did bring some of the revenue in there. But overall, the business has performed well and when you look at our content on trucks, that shift is being recognized. The launches have begun. We were starting at -- as I mentioned on the statement earlier about 9 out of the 14 launches already have started to progress. So we're starting to see some of that volume translate. So it's been good mix. It's -- many of the right customers, many of the right products. So we feel comfortable on that front. When we look out for the balance of the year, I think we're going to see a little bit as some of the programs phase out. We are going to see probably moving a little bit more towards the general market and then launch -- as launches start to ramp up going forward, we would see a slight pick up. But right now, we are -- good quarter. We manage through getting -- many of our first quarter items as when our customers are in shut down. So even that strength of that quarter, it was a solid top line quarter. The focus really is driving the launches and getting through the launches, as we've mentioned, a lot of launch activity through the quarter. A lot of -- as Lillian said in her statement, a lot of the team spent time over the Christmas holidays. We are launching in Mexico. We had a lot of plants in Mexico. Now, we're going through some launches, of course, some truck programs. And the team did an outstanding job. So I do want to -- at least on the call, as many Shiloh team members are on the call, recognize a lot of effort from our operations and our team members, our engineers, which spent their holidays doing launches.

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Richard Clayton Carlson, BMO Capital Markets Equity Research - Analyst [4]

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Got it. And then you were very well balanced across your 3 product brands for 2018. Assuming though there's probably -- you're going to see some shifts with all these launches, what are some of the fastest-growing areas? I mean, is that -- the CastLight and the StampLight, the fastest growers?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [5]

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We see a lot of activity on the casting side, both on the magnesium front, on the aluminum front. Those are the businesses that are heavy lightweighting type of technologies. Also our -- in BlankLight laser welding activities, we are seeing some significant opportunities. And what we're able to do with our door-inners and liftgates and really, some of the new technology that -- our aluminum laser welded technology is a new technology that customers are starting to understand the value proposition. It's a brand-new technology. Again, similar to what we did with the axle housing first to market. We see some opportunities there. Also in China, with the focus on EV and what -- both from a lightweighting side but also from an NVH and sound side, our ShilohCore technology in Europe -- I'm sorry, in China, a lot of activity around that as noise is so important and managing sound is so important on electrical vehicles. So we do see it happening in across a number of the different technologies that are going forward. But clearly, the casting side, both on the magnesium front as well as the aluminum side are important and growing. And really, our current -- I mentioned the large contract win in Europe. This technology is -- if you think of -- you think about steel and welding steel, but the ability to design a material in a process where aluminum could be welded to aluminum is again another significant breakthrough, that joining capability. So our technology around the joining aspect of mix -- of materials and mix materials is critical, and we see that as part of what drove this win. And this is an opportunity, again to bring our technology globally. So now, it's how do we roll out these technologies to different regions. And again, Europe is on a lightweighting side, leads many of the trends from a lightweighting side and so it -- this is a good example of Shiloh's leading technology and what we've been able to develop and put together.

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Richard Clayton Carlson, BMO Capital Markets Equity Research - Analyst [6]

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Got it. And then -- and just last one for me. SG&A was down quite a bit year-over-year. Just wondering is some of this from the restructuring efforts are starting to take place. And yes, how should we expect that for the rest of the year?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [7]

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I would say from an SG&A side, expect to see an average of about 7.5%, would be is where we would feel that we'd end, as the average for the year. It's down about a little over 8% from where we were, we closed 2017. So we get some good trend on that front. Last year, in the quarter 2, we did have our acquisition expenses a little over $2 million were included in SG&A last year, quarter 1. So that's something that obviously, didn't repeat this year. And then you have a little bit of restructuring. Also we had a refocus on launches. So some of the activities and with kind of time and talent focused more on launches versus being involved in the SG&A. So there were more -- they were focused on the plant side to make sure the programs were launching well. And right now, as I said, we -- the customer satisfaction is there. We're continuing to make progress on these launches. Again a lot of activity, 9 different facilities, 5 countries, 3 continents. We have a lot of our team spending time in the plants.

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Operator [8]

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The next question comes from the line of John Murphy with Bank of America.

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Yucong Shi, BofA Merrill Lynch, Research Division - Research Analyst [9]

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This is Gwen Shi on for John Murphy. Kind of continuing on with the portfolio train of thought, have elevated steel aluminum cost for 2018 from tariffs resulted in any tangible shift by clients to Shiloh products as you guys kind of talked about last year? Or is it more that your existing consumers, customers kind of reap this benefit shielded from the higher commodity costs?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [10]

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Very good question, Gwen. When you look at what is happening from a -- how we're protected is we're on resale programs. So we don't see a direct -- we've been able to manage if there's any direct impact with our customers. So we don't see that as a risk. What we are seeing is -- and this is where our laser welding -- aluminum laser welding technology is so critical. What customers are seeing is now this is an opportunity for them to offset some of the impact of tariffs. So the value prop of these technologies is actually increased in their eyes and the importance of them is increasing. So we do see that it has opened a broader discussion. It's opened, let's say, a window to bring some of the technologies in front of the customers which has been a positive move. But even in the traditional steel side, some of our technology with the press hardened steel, with the gen 3 steels, where we're able to do some unique processing to the equipment is, again, opening up opportunities. So while in general, we want open and free trade, we are not sitting back or I should say, we're taking advantage of what opportunities present in the marketplace. So we do see some increased level of dialogue on the subject of alternative technologies and alternative processing.

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Yucong Shi, BofA Merrill Lynch, Research Division - Research Analyst [11]

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Got it. Okay, that's helpful. And just a quick question on the launches. I mean, it sounds like everything has been progressing pretty much as expected or even fully better than expected. Has anything in the quarter, a reason that would kind of change your expectations? And going forward, what kind of actions do you think can help mitigate those future launch costs? And as a guys like, turn over the product portfolio, what gives you guys confidence that this launch costs won't recur?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [12]

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Right. From a standpoint of -- we are making progress on the launches. We knew when we spoke to you all on the call last year, we knew quarter 1 was going to be heavy, and it has been heavy. And we are delivering to our commitments to our customers so that's obviously, a good positive. We do see the cost coming down as we get through the launches. So we do see lower numbers coming into -- lower costs going into -- as we get to quarter 2. Obviously, improved profitability would be a result, and we still see a more robust second half of 2019, as we discussed. So that part of the plan is moving forward, and we feel confident on that front. One of the things that we've done from a -- I'll say it again, a tighter control over launch costs. We have introduced a number of more robust processes. It's both from a launch readiness review standpoint, trying to make sure that we're really challenging some of these things more upfront with customers to get better alignment, more upfront. And we are seeing the result as we are working on new programs for 2020, 2021, 2022, just that process from the challenges or the tough discussions up front with the customers are happening earlier as well as from a timing of looking at when these different programs roll out. So there's -- the team has put a number of different processes and controls in place that give me -- that gives me and I'll say the leadership team, much more confidence in the process going forward. So I think while the launch activity will be high, launch activity will still remain complex, but how do we better manage the cost from that? I think we have a model in place and I'm confident we have the model in place that can deliver a better level loaded type of approach. But we did it -- in short -- and really, I talked about our industry 4.0. -- I'm sorry, Gwen. When we talk about our industry 4.0, part of that is going to be built into that from our operational standpoint of when we launched the equipment readiness, the ability to get more data out of the PLCs, out of the equipment, to be able to respond faster to time -- to react, more rapid timing. Just in any other AI type of environment, there's a lot of information in our equipment in these PLCs. How do we take that data and translate that data into action and response? Preventive maintenance? Uptime? So really, it is making sure that we're staying on the front, not only with the product technology but making sure that we stay in front on the process technology as well.

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Operator [13]

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The next question is from the line of Tom Harenburg with Carl M. Hennig.

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Tom Harenburg, Carl M. Hennig, Inc. - Director & Owner [14]

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In prior statements, you had mentioned that approximately your goal is $1,500 on some of these vehicles. It would seem to me that the Tesla would be -- being a new vehicle and a lightweight vehicle, an ideal candidate for that. Can you tell me how many dollar-wise parts are on there, or I should say how many dollars of parts are on a Tesla?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [15]

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Tom, I would start with Tesla. There's really 2 different types of vehicles with Tesla. With the Model S, Model X. They are heavy aluminum-content vehicles and I -- while we don't use specific dollar amounts, I will say those Tesla models are some of our highest content vehicles that we have, because of the heavy or the significant amount of aluminum components. And so we're structural. We do battery housing protection. We do a lot of different components for them. So the Model S, Model X would be -- has a lot of Shiloh content. Model X, they took -- the Model 3, I'm sorry. Model 3, they took a different structural approach, and it's much more steel. Now we have a fair amount of content on a Model 3 but the architecture is different. We are working with, again, Tesla on other ways to help them on the Model 3, to actually lighten the Model 3. There are some interesting things that we're -- as they've gotten out through the launch, there are more in their production readiness. Now they go back and look at some alternatives to help on the design. So again, all great vehicles performing -- I mean, a great relationship with them. Again, with Tesla, we're excited about the launch of their facility in China because with our Nantong facility coming online and then from an aluminum front, our ShilohCore and the NVH side, these are additional opportunities to work with them. But Tesla does have a different structure for S and X versus Model 3. But you're correct in your assumption. Those vehicles are high content. Now to your statement -- your question around the $1,500 opportunity, we still feel that that's a good target for us. I mean, we had a full portfolio in a particular vehicle. So that is something, how do we build that, that depth of technology and depth of the relationship with the customer, and we see that happening as we go forward. So we're -- we still think that's a good target for us to work with, and we see that opportunity to improve.

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Tom Harenburg, Carl M. Hennig, Inc. - Director & Owner [16]

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Okay, the sedan market versus the SUV/truck market, is it possible that you've misjudged that market and hooked your horse to the sedan market? What percentage of your business is done in the sedan versus the SUV truck vehicle?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [17]

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We're -- when you look at the mix, we're probably 60-40 or approaching 60-40 cars versus trucks. While the U.S. REIT is moving from sedans, when you look at the -- where we're in the cars, we're with some of the agents in the -- with their cars. They are remaining in that sector. And then also from a standpoint on the premium side, when you look at BMW and Mercedes or Daimler, they're still sticking with -- they still see opportunities in our premium sectors and those are the customers where we're on the sedans, we're -- on sedans primarily, with the Asian OEMs, and we're on sedans with the, I'll say, the German, primarily, the German premium vehicles is where we're on the sedan front. And they've been very resilient, even in 2008, '09 time from -- those types of vehicles were resilient, and I think it's prudent from a standpoint of how the industry can shift and will shift. Now at the same time when we talk about crossovers, CUVs, they are to a certain degree have similar automotive or sedan structure. So it's -- they're raised off the ground a little bit more, they're sedan on steroids, so to speak. So they still have similar architectures to a sedan. So that terminology of mix of structure is still -- we try to still stay balanced with them to be resilient in different cyclicality of the industry.

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Tom Harenburg, Carl M. Hennig, Inc. - Director & Owner [18]

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Okay. And final question, MTD was your largest shareholder and while back, they moved those shares to another entity. Can you give us any reason for why they did that?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [19]

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MTD, they're -- yes, you're right, they're a large shareholders. They had moved -- they basically changed their structure to an LLC type of structure. And so they really just transferred their shares and created a new entity called Oak Tree and that was really more of a strategy and that's directly with them. They're just a shareholder in that respect. So I can't comment more on that. They still own the shares. They just -- they changed the entities.

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Operator [20]

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The next question is from the line of Alan Weber with Robotti & Company.

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Alan W. Weber, Robotti & Company Advisors, LLC - Research Associate [21]

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Can you talk about, in the quarter, the gross profit, how much of a decline was actually due to the product launches? And those launches that you talk about in the quarter, a year out, what do you expect the revenues to be? Just kind of in general terms?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [22]

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Alan, again, from a gross profit, I'd say, all of that decline was associated with launch costs. And so we see that improving as we go through the quarter. So that's where those -- the launch costs fall in that cost of good sold, type of line. So that is the challenge that we have. We -- we're still -- I mean, we're already a month into our quarter 2, we see that trend improving. So we know where -- as we get through these launches, it will be -- that, that number improves. When you look at the amount of business activity, what we talked about last year, roughly we're launching probably 10% to 15% of our annual volume, is being basically turned over and with these launches, just in the first half. So if you put it into that perspective, it is a significant mix shift of our product because in many cases, we are -- the commodity product is falling out with a new technology being put in. And so that's where we see that exit rate and that as we get through that. So from a year from now, margins are considerably higher, and we do feel that our 2020 type of double-digit exit, going into 2021 type of number is -- where that really comes from is the -- is that mix shift.

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Alan W. Weber, Robotti & Company Advisors, LLC - Research Associate [23]

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So Ramzi, is it fair to look at it as the start up or the launching costs are may be higher than you would have expected, but it really doesn't -- in your view, it doesn't change once they're in full production what your margin should be?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [24]

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That is correct. And they are higher than, I would say, we expected partly because of the concentration from a standpoint of how they occurred, how they rolled out. There are some challenges in them that we were -- that as we -- we knew they were going to be difficult with new technologies. But I'd say that is a good way to look at it. The total -- the profitability of those programs hasn't changed long term. And that's really where we included those costs, those launch costs in our 2019 guidance. So we build that heavy -- that understanding of what was going to be a challenge, we built it into the '19 guidance, and we still feel comfortable, as Lillian reaffirmed, in our performance there. We plan on the cost being high. We understood what the cost would be and they won't change the long-term opportunity as we get through them on the profitability of the program.

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Alan W. Weber, Robotti & Company Advisors, LLC - Research Associate [25]

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And then the other follow-up is when you talk about -- you just talked about the sunsetting of certain programs. At what point is that really behind you? And these product launches really become incremental revenue -- increase in revenue.

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [26]

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I would say we are continuing to eliminate them. We're getting later and later of the -- I've used that word baseball analogy. So we're probably like in the seventh or eighth inning. I mean so we're getting later, there will always be a little bit of change over on the bottom. But I would say we're getting through the bulk of that, where the new business wins are -- they're -- they've become more of the incremental -- and that's the technology replacing. If you think of -- on what the business development team accomplished this year, I mean, we booked $290 million total contract value in quarter 1. Last year, it was $104 million on quarter 1. So when you look at the bookings or the opportunity on that front, some great work from the team. So the strategy, the technology, the customer partnering, it's all going in the right way. We still got to perform on the -- we still got to block and tackle and do the day-to-day things to make sure that we're successful, but we are seeing the results of those efforts.

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Alan W. Weber, Robotti & Company Advisors, LLC - Research Associate [27]

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And then your adjusted EBITDA, there was a line item for legal and professional of $1.6 million. What was that for?

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Lillian Etzkorn, Shiloh Industries, Inc. - Senior VP & CFO [28]

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So that relates, Alan, to things such as some of the operational consulting that we have on board. Some of the services to support things such as the tax R&D credits. It's a combination of several items in there.

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Alan W. Weber, Robotti & Company Advisors, LLC - Research Associate [29]

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Okay. And then did you say -- did you imply that SG&A as a percent of revenue will actually go up higher than what it was in this quarter? And what -- why is that?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [30]

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Yes. For the full year, we would expect it to be at 7.5%, which is down from 8% last year and the year before that was 8.3%. So overall, we see a trend down on SG&A. Something that we're purposely trying to manage and bring that lower each quarter, or year-to-year. What we had is a lot of the efforts that were, let's say, refocused from some of our project work on general engineering or future, let's say, R&D projects. Those team members were more focused on the -- not on the launches. So what you saw is some of those costs at a high level, you can say that they were seen in a cost of goods sold area versus being more traditional SG&A. So we see SG&A moving to the 7.5%, but we'll also see the gross margin improving at an accelerated to that, which gives you the improved EBITDA. So call it a little bit of mix.

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Alan W. Weber, Robotti & Company Advisors, LLC - Research Associate [31]

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Okay, and then my last question. From your earlier comments, is China actually losing money at this point?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [32]

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The China for the launch causes, we launch the plants. China is, I would say, 2017 when we just got our ShilohCore, we were -- or 2018, we were generating a profit. Right now, we have a lot of activity focused on launching of Nantong, Nantong launches, and so then we see that being a positive. So that's part of driven by launch cost. Nantong has heavy launch cost bringing this plant up online. So that's part of that -- that's included in the 2019 guidance was the -- that knowledge and that plant.

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Operator [33]

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The next question is from the line of [George Gaspar], private investor.

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Unidentified Participant, [34]

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First question. I'd like to just press a little bit further on China here. Looks like we got a little elongated on waiting for the progress to develop. Can you highlight where you are in the number of companies that you're dealing with now, on production? And what your target is as you move forward into midyear or into the end of 2019? What can we expect on the volume? What kind of volume are you getting now, if any, can you tell us that?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [35]

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When you look at -- China is roughly, call it 2% of our revenue or so. We're focused on GM and SGM for the current ShilohCore technology. When you look at what would be launched out of Nantong, again, it's a few -- it's those few customers plus a couple more. So Nantong on launch will be on the transmission side. So that is the trend, so while it's -- you use the word elongated. I would say the ramp up is on track from a customer side. So it is -- we're on -- and time to be September production. So that's -- SOP starts June. Well, they'll ramp up from there. So that's pretty much on track to where they expected and that's where we see the numbers going -- why we know the numbers are going to improve from there. Where we're excited about China is really, their push on the EV side. When you look at our portfolio from electrical vehicle opportunity, some good conversations. We're talking to a lot like it's new -- a lot of this is new technology form. We're not going to sell it inexpensively. So if you want this technology, we're holding towards our, I'll say, global margin expectations. We're not looking to do anything for a lower cost in China. These are global technologies. They need to be priced at a global level and that's where we're taking them forward. So we're excited about the opportunities in China. We're excited about the Nantong launch. Some of my team was just in China doing the launch readiness review just 2 weeks ago, and excited about what the teams there -- again, it's -- I spoke earlier about the talent that we have in -- from a European side, the team in China is -- they're doing a lot of good things. This is a technology we've launched in North America. A lot of the team has spent -- the U.S. team has spent time in China. The China team has spent time in the U.S. plant, working on the -- working on understanding the process and technology, the equipment technology. So we feel good about what we're seeing and excited about this launch from the start here. I mean right now, we're -- that we're heavy in it. This is part of the launch for us, we're heavy in it. So we're excited about what we see there.

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Unidentified Participant, [36]

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Okay. If -- can you give us a number of auto manufacturers that you're going to be dealing with and producing componentry for, as we reach into that say, October-December period?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [37]

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It's primarily targeted around 2 to 3, is where we're going to be, where the facility launches. We're talking -- like I said, we're talking to a lot. We're new to China, but we're launching with 2 to 3 customers.

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Unidentified Participant, [38]

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Okay. Will any be American manufacturers over there or it's all China?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [39]

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I'm sorry. Can you repeat that, George?

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Unidentified Participant, [40]

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Will you be producing for American automotive manufacturers over there or China-based companies?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [41]

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They are -- when you look at -- we have -- we're doing work for Volvo, which is -- also which really, we're doing work with GM. We're doing work with SGM. So it's a combination of China -- but again, our cross car beams, our mag components, these are things that -- again, we're looking at global. I mean, these are with Volvo coming into South Carolina, that's creating an opportunity for us or for them to be a global customer to us versus just a China and Europe.

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Unidentified Participant, [42]

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Okay. All right. And then I'd like to follow-up from comments that were made by you all in Chicago, last late August, at an investment conference there about the rear axle housing prospects. And you seem to be pretty close to a launch there. Can you give us any idea where you're at on this? What kind of sales are you generating from it at this point in time? And I know your target was maybe $200 million. Can you give us an update on how you're viewing that product?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [43]

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We -- that's 1 of the 9 launches that is going on right now. So -- well, we said we're progressing on them. So we're in that one. That one is definitely exciting. That one is a first to market in that component. We're working closely with our customer because that's a vehicle that is just going -- just about to launch as well. So that one is one that we're going into. And now that we're going to be on a vehicle, I'd say people were not sure -- any time somebody has to be first and then there's a lot of people who talk about being a fast follower. So we're having some conversations with the -- I'll say the pickup truck because this is really designed from a pickup truck standpoint. That truck market there -- now the other major OEMs are saying, "Huh, it is possible." So we are starting to have some conversations on that front. So we see that as a good opportunity. And again, we're in a launch right now. We're -- that's 1 of the 9 that's progressing I'll say built into our 2019 guidance.

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Unidentified Participant, [44]

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Okay. And then a question on -- you mentioned Mexico in your comments earlier. The announcement in the last 48 hours by Ford that they're going to shift a new plant from Mexico to Michigan. And can you just give us a flavor of these change outs that are going on in the industry, in the United States right now? It has to really be a big challenge for you and what are the pluses and minuses that you see and opportunity that comes to the company with what's going on in the consolidations and other expansion?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [45]

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What we've worked on from our manufacturing footprint is really to create that flexibility and the ability to -- when we design tools to fit and pieces of equipment that could be North America or Europe or in the -- or U.S., Mexico. So we feel that there will be a fair amount of product shift that is going to occur over the next couple of years. And what we want to make sure, and that's really we worked on last year and last few years, is making sure that we have a model that is more flexible than I'd say, some of our peer groups, for example. And I think what we're going to see -- later today, we're going to have a -- there's going to be an announcement on Brexit. That's going to change, or may change or influence JLR's manufacturing strategy. What we've kind of built with the acquisition is flexibility to manage. If they make a product shift change or a location of manufacturing, we want to be positioned to support a customer. I'd say the same thing with the U.S. OEMs is, where they want to manufacture, how do we make sure that we have a -- well, we consolidated some of our footprint in the U.S. to get our costs in line and get our fix costs in line. We still feel that we're very well positioned to manage if there's a shift from Mexico to the U.S. or U.S. to Mexico, for that matter. So the Mexican market is still growing. We're positioned with Mexico, our Saltillo and our Celaya facilities are well positioned to meet the geographic footprints of the OEMs there. Mexico is still -- it's going to remain and -- while there's a lot of discussion of U.S. and Mexico, Mexico still is a strong export market for many of the other OEMs for their other regions. So Mexico as a region and as a market is still a growth market. We hear it in -- always in context of the U.S. and Mexico, and I'll say that the debate or challenge between the 2. But we don't -- equally, people should know is Mexico is a strong and growing market, and it's a good export market for other -- for the OEMs from that. So it is still important presence on its own.

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Unidentified Participant, [46]

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All right. Okay, and then one last on the U.S. side. Can you give us a progress report on the Tennessee plant, how it's coming along? And I assume that the auto expansion into the South Carolina area that should be getting prior along, now that should be helping you out of the Tennessee plant. Can you describe that?

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [47]

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Yes. So Tennessee -- in our Clarksville, Tennessee plant is where we're launching some innovative technology and structural chassis on the magnesium front for IP structures, cross car beams and products like that. That launch is -- one of the questions was cars versus trucks. That's all SUVs for Mercedes and BMW. So that product is launching. From a standpoint of the vehicle, you saw -- you're starting to see the new X7, BMW's first -- that's their new larger SUV or that -- our products on that. On the 5 -- X5, so these are products that are growing from a BMW side, Mercedes on their SUVs. So that plant is again 1 of the 9 launches. That one is going well. That one is -- we're heavy into that. All of the -- I'll say Phase I, the first set of equipment, 3 large presses are all in, producing -- are starting to run their trails and produce their product. We have still more equipment coming in in 2020. So that's starting to hum along.

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Operator [48]

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Thank you. At this time, I will turn the floor back to management for closing remarks.

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Ramzi Y. Hermiz, Shiloh Industries, Inc. - President, CEO & Director [49]

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Well, thank you for everybody's time this morning. Again, we feel confident in our -- the opportunities that are in front of us. We're focused on our launches. We're focused on making sure we deliver those to our customers, which really set the stage for our longer-term profitability. Those efforts are going well. As Lillian outlined, we feel confident in our ability to deliver what our -- what we've put out there from a guidance standpoint. Again, we know that there is -- there will continue to be events that occur. We're trying to position Shiloh in -- to have that flexibility to respond, to have a flexible organization, to be able to flex ourselves to meet demand in the marketplace, and we feel comfortable that we're building that type of structure and that type of business model. From a technology standpoint, we're still investing in some of the latest technology and leading and providing the marketplace with innovative technology, and that is going in the right direction. And we look forward to sharing additional positive news on some of the success of new business. Our business development team, as I said, we had a very strong quarter 1. There's a lot opportunities, a lot of interest in what Shiloh is doing. We just got to make sure we deliver it. We get through the launches, and we have a very robust second half of 2019. So thank you very much for your time, and wishing everybody a great day.

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Operator [50]

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This will conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time.